Top 5 Life Insurance Mistakes

Posted on April 25, 2014 and updated May 5, 2014 in Insurance Types, Life Insurance Canada News, Mortgage Insurance, Permanent Insurance, Term Insurance 7 min read
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Life insurance is always a tough sell: an invisible product that the policyholder will never actually benefit from directly, and yet they still have to pay for it every month.

But if you don’t have it, you won’t be able to make sure your family maintains the lifestyle they’ve become accustomed to or replace your income when you pass away.

Although, just because you have life insurance, doesn’t mean it’s necessarily working for you in the right way. Since life insurance is such a complex product, many policyholders make mistakes that not only turn them off of life insurance all together but also ensure that their policies aren’t working for them as intended.

Below are the most common life insurance mistakes people make, as reported by some of the top financial experts and publications in Canada.

1. Not Having Life Insurance at All

One-third of Canadians don’t actually have life insurance, according to an article that appeared in Investment Executive. The TD Insurance Risky Business Poll that the article reports on showed that the majority of Canadians are cautious risk-avoiders (55%), with only 8% saying they are risk-takers. However, the same poll finds that three-in-ten Canadians don’t have life insurance and six-in-ten don’t have critical illness insurance.

Of the 31% of Canadians who do not have life insurance, 40% say they don’t think it’s necessary, 23% admit they probably should have it, and another 23% feel they can’t afford it. Plus, one-third of Canadians worry they aren’t adequately protected by their insurance policies.

Not having life insurance or critical illness insurance opens Canadians up to unnecessary financial hardship and risk. Why force your family into debt when you die just because you didn’t purchase life insurance? Your income is an important part of your family’s life, and the last thing they want to have to think about while grieving your passing is how they’re going to pay their bills or mortgage.

Likewise, if you are diagnosed with a critical illness like cancer, the last thing you want to think about when you are going through harrowing medical treatments is how you’re going to maintain an income and fulfill your financial obligations so why take the risk?

2. Not Having Enough Life Insurance

When we asked personal finance expert and TV personality Gail Vaz-Oxlade “What is the biggest life insurance mistake people make?” she replied, “Not buying enough or the right kind of life insurance for their specific needs.”

This is what we heard from a lot of the personalities and executives who answered that question in our “What Type of Life Insurance Do the Experts Own?” section.

Why do people make this mistake? Mostly it’s because they don’t really know how much life insurance they need. We recommend going to our Needs Analysis Calculator and plugging in your assets, total amount of existing life insurance, total liabilities, and the amount of income needed by the survivors in your family left behind after your death. This way, you can find out exactly how much life insurance you need and never get stuck only being able to cover one or two aspects of all of your financial needs.

Another reason people don’t have enough life insurance is because they don’t know where to go to talk about their life insurance needs and whom to talk to. LSM Insurance recommends avoiding captive agents who only have access to one life insurance company and are there to sell you a policy from that company.

You should also avoid banks for the same reason. They are not insurance experts and handle many types of transactions, so they won’t be able to advise you on your insurance needs properly in most cases. Instead, approach an independent broker who can answer all of your questions and advocate for you to insurance companies when you apply for a policy. They also have access to many life insurance companies, so they can play them against each other to find you the best price and the best plan for your needs.

3. Buying Life Insurance from a Bank or Credit Card Company

Ellen Roseman, personal finance columnist for the Toronto Star, has written extensively on the rackets that are mortgage life insurance and credit insurance.

Mortgage life insurance is sold as an afterthought when you approach a bank to apply for a mortgage. It’s usually sold as a means to pay your mortgage in the event of your death, but it is very hard to collect the benefits when you need them.

“Of course, banks often do their underwriting after the customer makes a claim and refund only the premiums if the claim is denied,” says Roseman.

This is known as “post-claim underwriting.” It’s when the insurance company does the underwriting on the policy, to see if you qualify, after you’ve already been paying the premiums. It puts one at an extreme disadvantage because as they age, they’re not as healthy as when they first applied and are more likely to be declined. Plus, if you are denied, you will only receive the premiums, which is a pittance compared to what your family could have received if you qualified for the benefits.

Credit card insurance is very similar, but often people don’t even realize they’ve signed up for it. 

“My argument is that the insurance is often misrepresented to customers and promoted through high-pressure sales pitches. Sometimes, the sales pitch is so low-key that customers don’t often know they’ve signed up,” says Roseman.

Some plans even say they stop charging you after age 65, but the banks don’t actually stop charging you, so it’s important to read things thoroughly before you sign up and don’t sign up under pressure or over the phone.

4. Not Reading the Exclusions and Clauses

Family and friends are scrambling to pay the medical bills of a BC skydiver who was insured during a jump gone wrong in the Arizona desert, according to CTV News.

Kenzie Markey had travel insurance, but because her injury happened while she was skydiving and the policy has an exclusion related to extreme sports, her policy didn’t pay out. Now, she is stuck with a $500,000 U.S. medical bill.

The same thing can happen with life insurance. Many life insurance policies include exclusions if the policyholder dies as a result of things like extreme sports and suicide. 

This is why every potential buyer of a life insurance policy needs to read the fine print before purchasing a policy. Some insurance policies do have coverage for activities like skydiving and military service, but you’ll need to shop around to find one. Ask your insurance broker for details.

5. Buying a Policy that’s Non-Convertible

In its article “Five Questions to Ask When Buying Life Insurance,” Financial Post Business recommends asking if your term insurance policy is convertible.

This is because most people buy term insurance because it is often cheaper initially than permanent insurance and is good for a stated period of time such as ten, 20, 30, or more years. It’s perfect for covering a specific expense, like your children’s college education or your mortgage.

However, insurance needs evolve, and not all our expenses are so specific for the rest of our lives. Plus, with term insurance getting more expensive the more times you renew it, it makes more sense to invest in permanent insurance because the premiums stay the same for the life of your policy. 

So make sure your term policy is convertible because if it is, you’ll be able to convert your term policy to a permanent policy without additional medical evidence up to a certain age (usually 65).

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